Global interest rates have dominated market moves with the US Fed statement maintaining strong expectations that US rates would be cut aggressively. In this environment, the dollar weakened sharply, although the Euro was hampered by expectations that the ECB would also take further action. Expectations of rate cuts elsewhere supported Sterling ahead of important political and economic UK events on Thursday with interest rate expectations likely to remain dominant.
Pound Sterling (GBP)
UK May inflation declined slightly to 2.0% from 2.1%, in line with forecasts, while the CBI remained pessimistic over the industrial outlook. Although there were no major positive Sterling factors, the UK currency recovered some ground. Primarily, this has been due to a downgrading of expectations surrounding the US and Euro-zone and speculation over sharp interest rate cuts. GBP/USD recovered to test 1.2700 with GBP/EUR also recovering some losses to 1.1260. There are important events on Thursday with the Bank of England policy statement while the Conservative Party leadership candidates will be cut to the final two.
In comments on Tuesday, ECB President Draghi remained concerned over the Euro-zone outlook and stated that the bank would take further action if necessary including the possibility of fresh interest rate cuts. The Euro dipped lower following the comments as growth fears continued, although German bond yields moved higher on Wednesday and weakness elsewhere was an important element in providing single-currency protection. EUR/USD found support below 1.1200 and recovered to around 1.1280 as the dollar stumbled. A lack of confidence in the global outlook continued to boost the Swiss franc.
The Federal Reserve held interest rates at 2.50% following the latest policy meeting, in line with forecasts. Many members, however, were expecting rates to be cut twice over the second half of 2019 and overall 2020 projections were cut. A language shift also reinforced expectations that US rates would be cut aggressively, especially with Chair Powell under sustained political pressure. The dollar still secured an element of protection from weakness in other major currencies, but a decline in yields to 2-year lows pushed the US currency lower with USD/JPY sliding to near 107.50 as the Bank of Japan made no policy changes.
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